Lorillard Tobacco Company v. Chester, Willcox & Saxbe ( 2009 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0435p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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LORILLARD TOBACCO COMPANY et al.,
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Plaintiffs,
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No. 08-4383
v.
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>
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Defendants. -
CHESTER, WILLCOX & SAXBE et al.,
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W.C. GENTRY, P.A., f.k.a. Gentry, Phillips &
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Hodak, P.A.; GENTRY AND PHILLIPS, P.A.;
and GP (FL) FUNDING, III, LLC, -
Defendants-Appellants, -
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v.
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LESTER G. FANT, III; GP (FL) FUNDING II,
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LLC; GALWAY II, INC.; GALWAY T-1, LLC;
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and GALWAY PARTNERS, LLC,
Appellees. -
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Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 04-00715—Edmund A. Sargus, Jr., District Judge.
Argued: December 1, 2009
Decided and Filed: December 23, 2009
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Before: GILMAN and KETHLEDGE, Circuit Judges; BERTELSMAN, District Judge.
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The Honorable William O. Bertelsman, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
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COUNSEL
ARGUED: John A. DeVault, III, BEDELL, DITTMAR, DeVAULT, PILLANS &
COXE, P.A., Jacksonville, Florida, for Appellants. Thomas W. Hill, KEGLER,
BROWN, HILL & RITTER, Columbus, Ohio, for Appellees. ON BRIEF: John A.
DeVault, III, Patrick P. Coll, BEDELL, DITTMAR, DeVAULT, PILLANS & COXE,
P.A., Jacksonville, Florida, for Appellants. Thomas W. Hill, Christopher J. Weber,
KEGLER, BROWN, HILL & RITTER, Columbus, Ohio, for Appellees.
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OPINION
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RONALD LEE GILMAN, Circuit Judge. This case arises from a statutory
interpleader class action brought to determine the rights of various private counsel to
certain attorney fees awarded in the nationwide tobacco litigation of the late 1990s.
Several major tobacco companies and a class of private counsel involved in the litigation
entered into a Settlement Agreement that was approved in a final judgment entered by
the United States District Court for the Southern District of Ohio. In that judgment, the
court enjoined the parties and class members from bringing any further claims relating
to the subject matter of the Settlement Agreement. One of the class members, who had
participated in the tobacco litigation in Florida, later filed a complaint in a Florida state
court that raised matters relating to its entitlement to the funds at issue in the interpleader
action.
The district court enjoined the parties to the state-court litigation from proceeding
with that action, concluding that they were prohibited from doing so by the permanent
injunction entered in the interpleader case. Florida counsel appeals, claiming that the
new injunction exceeds the scope of the Settlement Agreement and violates the Anti-
Injunction Act. For the reasons set forth below, we AFFIRM the order of the district
court enjoining the parties from proceeding in the state-court litigation.
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I. BACKGROUND
A. Prior appeal
This case is on appeal to the Sixth Circuit for the second time. The relevant
factual and procedural background was set forth in the prior decision, Lorillard Tobacco
Co. v. Chester, Willcox & Saxbe, LLP, 546 F.3d 752 (6th Cir. 2008), and is reproduced
below.
[1]. The Fee Payment Agreements
In the 1990s, a number of states filed lawsuits against tobacco
companies, seeking damages for the states’ treatment of smoking-related
illnesses. In 1997 and 1998, Plaintiffs [Lorillard Tobacco Company,
Philip Morris USA Inc., and R.J. Reynolds Company] entered settlement
agreements with the states, many of which were represented by private
counsel. Mississippi, Texas and Florida were the first states to initiate
the suits and the first states to settle, and as part of these first three
settlements, Plaintiffs entered fee payment agreements with the private
counsel representing the three states (“MTF Counsel”). In September
1998, Florida’s outside counsel entered a Florida Fee Payment
Agreement (“Florida FPA”) with Plaintiffs. Like the fee payment
agreements entered by counsel for Mississippi and Texas, the Florida
FPA called for a panel of arbitrators to determine the fee award for
Florida’s outside attorneys. Pursuant to the three fee payment
agreements, in December 1998, a panel of arbitrators awarded a total of
approximately $8.17 billion to MTF Counsel, including a fee award for
Florida’s outside counsel of approximately $3.43 billion. The three fee
payment agreements anticipated that private counsel from other states
would have to be paid once those states settled; the agreements therefore
required Plaintiffs to make quarterly payments of $125 million until the
fees of all states’ private counsel were paid, including the $8.17 billion
owed to MTF Counsel. Each counsel would receive a pro rata share of
each quarterly payment, based on the outstanding balance owed to the
counsel as a percentage of the total outstanding balance of fees owed to
all private counsel.
In November 1998, Plaintiffs entered a Master Settlement
Agreement (“MSA”) with forty-six states and territories to settle the
remaining tobacco lawsuits. Pursuant to the MSA, Plaintiffs entered a
Model Fee Payment Agreement (“Model FPA”) with the states to
structure the payment of attorneys’ fees to outside counsel for the
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forty-six jurisdictions. Under the terms of the Model FPA, each
jurisdiction’s private counsel could either receive a negotiated payment
from Plaintiffs up front (a “liquidated fee”), or elect to arbitrate and be
paid an arbitration award by receiving a pro rata share of the $125
million quarterly payments which Plaintiffs had already committed to
paying. The Model FPA required Plaintiffs to set aside $1.25 billion for
the private counsel who negotiated liquidated fees, and to pay in full all
liquidated fees by the end of 2003.
Plaintiffs negotiated liquidated fees with counsel from
approximately twenty-one jurisdictions, while counsel from the
remaining jurisdictions opted for arbitration and a pro rata share of the
quarterly payments. Counsel from the states and territories that opted for
arbitration received a total award of approximately $6.08 billion;
including the fee awards to MTF Counsel, Plaintiffs’ total arbitration fee
payments totaled approximately $14.25 billion. Plaintiffs’ liquidated
fees to the twenty-one jurisdictions that negotiated such fees totaled
approximately $625 million. Pursuant to the Model FPA, Plaintiffs were
required to use the remaining $625 million of the $1.25 billion that it had
earmarked for liquidated fees as “supplemental payments” to the
arbitration fee award recipients, in addition to the $125 million quarterly
payments. Plaintiffs were to make the supplemental payments in five
annual installments of $125 million in the fourth quarter of every
calendar year beginning in 2004. All of Plaintiffs’ payments were to be
made without interest and were unsecured.
In 2001, rather than accept periodic, unsecured, non-interest
bearing payments, Florida Counsel [Terrell Hogan Ellis Yegelwel, P.A.;
Fonvielle Hinkle & Lewis, P.A.; Law Office of W.C. Gentry, P.A.;
Maher, Guiley & Maher, P.A.; and Nance, Cacciatore, Hamilton, Barger,
Nance & Cacciatore] sold their interest in the fee award for a lump sum
at a discounted price. As part of this transaction, each Florida Counsel
formed a limited liability company (“LLC”) and assigned its interest in
the fee award to the LLC. The LLCs then issued and sold secured notes
to public investors, with the proceeds going to Florida Counsel in
exchange for their interest in the attorneys’ fees. Additionally, the LLCs
pledged their interest in the fee payments to Deutsche Bank, the
indenture trustee, as collateral to secure payment of the principal and
interest on the notes. Upon forming the LLCs, each Florida Counsel sold
its interest in its LLC to an outside investor [— Lester G. Fant, III and
his LLCs].
[2]. The Interpleader Action
In 2004, a dispute arose concerning the supplemental payments
that Plaintiffs were required to make to arbitration fee award recipients
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in the fourth quarters of 2004 through 2008. To resolve the dispute,
Plaintiffs filed a class action suit for interpleader relief on August 5,
2004. The complaint alleged that MTF Counsel claimed a right to the
supplemental payments, even though the fee payment agreements with
Mississippi, Texas and Florida did not mention the supplemental
payments. The complaint further alleged that the non-MTF Counsel who
had entered the Model FPA and received fee awards in arbitration
claimed that MTF Counsel were not entitled to the supplemental
payments. The complaint named, as the two classes of defendants, MTF
Counsel and the non-MTF Counsel who were entitled to arbitration fee
awards. Upon filing their complaint, Plaintiffs deposited approximately
$66.34 million—the amount of the 2004 supplemental payment claimed
by MTF Counsel as their pro rata share—into the district court’s registry.
On September 10, 2004, Florida Counsel filed an answer in which
they argued that
[f]or the protection of the Plaintiffs and for the benefit of
all “Private Counsel” retained by states and territories in
connection with any “Tobacco Case” (defined as any
tobacco and health case), the Mississippi, Texas and
Florida Fee Payment Agreements set forth a national
single payment schedule with quarterly aggregate
national caps and the allocation of such proportionally
between all Private Counsel having unpaid fees. In
essence, the combination of provisions treats all Private
Counsel equally and, therefore, operates as a “Most
Favored Nations” clause for the benefit of all Private
Counsel.
Citing the Model FPA, Florida Counsel noted that “any portion of the
$1.25 billion that was not used to ‘liquidate fees’ was expressly
designated to be paid into the arbitrated fee fund for payment of fees of
‘each Private Counsel’ who elected for arbitration.” Florida Counsel
contended that because “Private Counsel” is defined in the Model FPA
as “all private counsel for all plaintiffs in a Tobacco Case (including
State outside counsel),” Florida Counsel were entitled to a share of the
supplemental payments, based on the combined structure of the Florida
FPA, the MSA and the Model FPA.
In the alternative, Florida Counsel asserted a counterclaim against
Plaintiffs, alleging that if the district court found that Florida Counsel
were not entitled to share in the supplemental payments, “then Plaintiffs
have breached their express agreement as well as their implied covenant
of good faith and fair dealing with Florida Counsel” in promising that
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Florida Counsel would share equally in all future attorneys’ fee
payments.
In December 2004, the parties reached a settlement in the
interpleader action (the “Settlement [Agreement]”). MTF Counsel
agreed to be paid half of the $66.34 million that they claimed from the
2004 supplemental payment and half of their pro rata share of the next
four supplemental payments, with the remainder paid to the other states’
private counsel who took arbitration awards. The district court granted
Plaintiffs’ motion for certification of the two classes of Defendants and
Plaintiffs’ motion for preliminary approval of the Settlement
[Agreement]. On January 10, 2005, following a fairness hearing, the
district court granted final approval of the Settlement [Agreement].
Pursuant to the Settlement [Agreement], all parties claiming a share of
the Settlement [fund] then filed acknowledgment forms with the district
court.
Deutsche Bank and [Fant’s] LLCs, contending to be the assignees
of the entirety of Florida Counsel’s fee award, filed acknowledgment
forms. Florida Counsel objected, contending that Deutsche Bank and
[Fant’s] LLCs were not entitled to the supplemental payments because
the supplemental payments did not arise specifically from the Florida
FPA. The district court overruled the objection on the ground that
Florida Counsel were judicially estopped from denying that [Fant’s]
LLCs and Deutsche Bank were entitled to the supplemental payments
under the Florida FPA. . . . Florida Counsel now timely appeal.
Lorillard Tobacco Co. v. Chester, Willcox & Saxbe, LLP, 546 F.3d 752, 754-56 (6th Cir.
2008) (citations omitted).
3. Resolution of the first appeal
In the first appeal of this case, we determined that the district court erred in
concluding that judicial estoppel barred Florida Counsel’s claim of entitlement to the
supplemental payments pursuant to the Model FPA. Id. at 758. Florida Counsel’s prior
argument was “that their right to equal treatment with all of the other private counsel
who received an arbitration award arose from the Florida FPA,” and Florida Counsel’s
later argument was that “the supplemental payment did not become due under the
Florida FPA, but rather under the Model FPA.” Id. Because there was no clear
inconsistency between the two arguments, judicial estoppel was found not to apply. Id.
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We declined to decide the merits of Florida Counsel’s arguments, however, and
remanded the case “for further development of the record in the district court.” Id. at
759.
B. Instant dispute
While the first appeal to this court was pending, one of the Florida
Counsel—Gentry and Phillips, P.A. (which appears to have changed names on several
occasions), along with its wholly owned subsidiary, GP (FL) Funding III, LLC—filed
suit in a Florida state court against Lester G. Fant, III; GP (FL) Funding II, LLC; Galway
T-1, LLC; Galway II, Inc.; and Galway Partners, LLC. We will refer to the plaintiffs in
the Florida state-court action collectively as “Gentry” and to the defendants in that action
collectively as “Fant.” According to the allegations of the complaint in the state-court
proceeding, “Fant is the founder and principal of each of the three Galway Defendants
(Galway T-1, LLC, Galway II, Inc. and Galway Partners, LLC).” Fant allegedly
“develops, markets and sells complex financing and securitization transactions which
offer lump sum payments (discounted from the fee income stream) to those who are
entitled to incremental payments of money over an extended period of time,” such as the
attorneys who have received fee awards through the tobacco litigation class settlements.
The complaint states that Fant approached Florida Counsel in late 2000 and early
2001 with a proposed securitization plan, in which Florida Counsel
would receive an immediate lump sum payment of their [attorney] fees
(instead of payments over potentially 20 years or more) by a form of
sale/transfer of their respective rights and interest in all the [attorney]
fees from the Tobacco litigation to newly-organized limited liability
companies (“Funding LLCs”) and then by transferring all ownership
rights and interests in the Funding LLCs to the Galway Defendants.
(The “immediate lump sum payment” allegation is not an entirely accurate
characterization of the Fant proposal because the agreement called for at least two
payments for the Florida FPA award and, as discussed below, quarterly payments for any
award of supplemental payments.) In any event, the complaint further states that the
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“Funding LLCs” would (1) “[i]ssue and sell secured bonds to investors (‘Investor
Bonds’),” (2) “[p]ledge their interests in the [attorney fees] to an indentured trustee
[Deutsche Bank] as collateral to secure payment of the principal and interest on the
Investor Bonds,” and (3) “[u]se the proceeds from the sales of the Investor Bonds to
purchase Florida Participating Counsel’s interest in the [attorney fees] at a discount.”
This agreement was formalized between Gentry and Fant in January 2001 through the
“Florida Membership Interests Purchase Agreement” (Purchase Agreement).
The Purchase Agreement provides, in Section 2.3(f), for the possibility that
Gentry would be awarded a share of the supplemental payments discussed above.
Although these payments would not increase the total fees paid to Florida Counsel, they
would accelerate the distribution schedule and provide for payment of a larger share of
the attorney fees sooner than previously expected. The present-day value of the sale of
Florida Counsel’s interests in these fees, therefore, would increase. If Florida Counsel
were to be awarded a share of the supplemental payments, the Purchase Agreement
provides that the sales price would increase by approximately $2,114,458 and that “an
amount equal to the amount of the increase in each quarterly payment will be payable
by the [Funding LLC] to [Florida Counsel] upon the [Funding LLC’s] receipt of such
increased quarterly payment until the redetermined Purchase Price has been paid in full.”
According to Gentry’s state-court complaint, Fant told Gentry that Fant’s
Funding LLCs would purchase Gentry’s right to the supplemental payments “for [Fant’s]
own investment versus for securitization to others.” (Emphasis in original.) Therein lies
the rub. According to Gentry, Fant misrepresented his plans and instead intended to use
the right to the supplemental payments as collateral for a personal loan from Deutsche
Bank to pay for the second lump sum already due to Gentry under the Purchase
Agreement. In other words, Fant allegedly used the right to the supplemental payments
as collateral to pay Gentry the discounted balance Fant owed on the original, undisputed
attorney-fee award under the Florida FPA (which purportedly did not include the right
to the supplemental payments).
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The problem caused by Fant’s pledge of the supplemental payments to Deutsche
Bank is twofold. First, Fant allegedly conveyed the supplemental payments back to
Gentry via a new company owned entirely by Gentry—GP (FL) Funding III, LLC—in
order to obtain more time to pay the second lump sum due under the Purchase
Agreement. He also purportedly “agreed to protect and assist Gentry’s right and
entitlement to the [supplemental payments] and to indemnify Gentry if he failed to
protect and preserve Gentry’s title and ownership of the [supplemental payments].”
Gentry contends that Fant never intended to honor this agreement, but instead “purported
to pledge” Gentry’s interest in the supplemental payments to Deutsche Bank “as
collateral for Fant and/or the Galway Defendants’ personal loan.” Because Fant
allegedly assigned the supplemental payments to both Deutsche Bank and Gentry, either
the pledge to Deutsche Bank was invalid or the conveyance to Gentry was fraudulent.
The second problem caused by this arrangement is that Deutsche Bank holds the
supplemental payments in trust for the holders of the subordinated Investment Bonds and
will not release the payments until after the maturation date of these bonds in
approximately 2013. This means that the supplemental payments will not be
immediately released to the Funding LLCs and therefore will not be distributed as a
quarterly payment to Gentry. Although Gentry will still receive the $2,114,458
additional purchase price, it will be received as a lump sum in 2013 rather than in the
fourth quarters of 2004 through 2008.
In its state-court complaint, Gentry contends that Fant (1) breached his fiduciary
duty by pledging Gentry’s right to the supplemental payments as collateral for a personal
loan, and (2) fraudulently induced Gentry to convey its right to the supplemental
payments to Fant. Gentry seeks damages for this allegedly tortious conduct. In addition,
Gentry seeks a decree that Fant’s LLC transferred “all rights, title and interest in the
[supplemental payments]” to Gentry’s LLC, and that Gentry is entitled to indemnity
from Fant for Gentry’s efforts in establishing entitlement to the supplemental payments
in the district court.
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After Gentry brought suit in the Florida state court, Fant filed a motion in the
district court to enjoin Gentry from prosecuting the state-court action. Fant argued that
an injunction was proper under the All Writs Act, 28 U.S.C. § 1651(a), because it was
necessary to protect the district court’s judgment and was also necessary in aid of the
court’s jurisdiction. At that time, the first appeal to this court (described in Part I.A.
above) had not yet been decided. Accordingly, the district court’s determination that
Deutsche Bank was entitled to receive the supplemental payments rather than Florida
Counsel generally, and Gentry specifically, was binding on the parties. Fant contended
that the state-court litigation attacked this decision regarding entitlement to the
supplemental payments by, for example, seeking a declaration that Fant had assigned the
right to these payments back to Gentry. He further asserted that the Settlement
Agreement and final judgment in the interpleader action barred Gentry’s state-court
litigation.
The Settlement Agreement between the parties to the interpleader action provides
for
the entry of an injunction by the Ohio Court [i.e., the federal district
court] enjoining any and all MTF [and] MSA . . . Counsel class members
from instituting or further asserting any claim in any court or in
arbitration against each other or Plaintiffs in any proceeding relating to
the Supplement, Future Supplements, . . . and/or seeking to reform,
discharge or otherwise amend the terms of this Settlement Agreement,
directly or indirectly.
This agreement was reflected in the final judgment entered by the district court, which
enjoins the parties from “instituting or further asserting any claim . . . relating to any
matter set forth in the Amended Complaint and/or the Settlement Agreement or seeking
to reform, discharge or otherwise amend the terms of the Settlement Agreement, directly
or indirectly.” In addition, the Settlement Agreement provides that “[t]he Ohio Court
shall retain exclusive jurisdiction over any and all disputes relating to this Settlement
Agreement, the enforcement of this Settlement Agreement and any monies to be
allocated, advanced or recouped pursuant to this Settlement Agreement.”
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Gentry responded to Fant’s motion by asserting that, among other things, an
injunction would violate the Anti-Injunction Act, 28 U.S.C. § 2283, because the issues
raised in the state-court litigation are allegedly distinct from those raised in the federal
action. The district court ultimately agreed with Fant, however, and issued the
injunction. In reaching its decision, the court reasoned:
Now, Gentry has changed course yet again, asserting that the Florida
Lawsuit, which seeks damages for the “wrongful” and “illegal” pledge
of a portion of the Supplement payment to Deutsche Bank, does not
relate to matters set forth in the Settlement Agreement. Without regard
to the merits, it is plain on the face of the Florida Lawsuit that it
implicates the provisions of the Settlement Agreement regarding
ownership of and claims to the Supplement payments. Regardless of
how Gentry’s Florida claims are captioned, or in what form Gentry seeks
payment of the Supplements, the claims in the Florida Lawsuit “relate to
any matter set forth in the Settlement Agreement.” Gentry is therefore
enjoined, based upon the terms of the permanent injunction to which they
agreed, from proceeding with the Florida Lawsuit.
(Citation omitted.) Gentry now appeals the district court’s decision.
II. ANALYSIS
A. Standard of review
“We review de novo the district court’s legal determination as to whether an
injunction may issue under the Anti-Injunction Act.” Great Earth Cos., Inc. v. Simons,
288 F.3d 878, 893 (6th Cir. 2002) (emphasis added). When reviewing a district court’s
discretionary decision regarding whether an injunction that does not violate the Act
should be granted, we utilize the abuse-of-discretion standard. Id. (quoting
Quackenbush v. Allstate Ins. Co., 121 F.3d 1372, 1377 (9th Cir. 1997)). An abuse of
discretion will be found where the district court “incorrectly applies the law or relies on
clearly erroneous findings of fact.” United States v. City of Detroit, 329 F.3d 515, 520
(6th Cir. 2003) (en banc).
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B. Propriety of the district court’s injunction against the state-court
proceedings
The present appeal raises the issue of whether the district court properly enjoined
the parties from proceeding in the Florida lawsuit. Gentry argues that “the district court
misconstrued Gentry’s state court action as seeking entitlement to the supplemental
payments rather than damages against Fant and his entities” and, in any event, “the
district court’s injunction exceeds the terms of the settlement agreement and violates the
Anti-Injunction Act.” In response, Fant contends that the district court properly
construed the state-court claims as “relating to the Supplemental Payments” and
correctly determined that the claims “fall squarely within the scope of the Settlement
Agreement and the district court’s permanent injunction.” Fant further asserts that the
contested injunction is appropriate under the All Writs Act and the Anti-Injunction Act
because the injunction is necessary in aid of the district court’s jurisdiction.
1. General principles of law
The All Writs Act provides that “[t]he Supreme Court and all courts established
by Act of Congress may issue all writs necessary or appropriate in aid of their respective
jurisdictions and agreeable to the usages and principles of law.” 28 U.S.C. § 1651.
When a federal court enjoins a state-court proceeding, however, the Anti-Injunction Act
limits the scope of the federal court’s authority: “A court of the United States may not
grant an injunction to stay proceedings in a State court except as expressly authorized
by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or
effectuate its judgments.” 28 U.S.C. § 2283. As this court has previously recognized,
the “prohibition extends to indirect injunctions against parties.” Tropf v. Fidelity Nat’l
Title Ins. Co., 289 F.3d 929, 941 (6th Cir. 2002).
The first exception to the Anti-Injunction Act is particularly relevant to the
instant dispute. Congress has expressly authorized the issuance of injunctions against
state-court proceedings in cases brought as statutory interpleader actions pursuant to 28
U.S.C. § 1335. In such cases,
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a district court may issue its process for all claimants and enter its order
restraining them from instituting or prosecuting any proceeding in any
State or United States court affecting the property, instrument or
obligation involved in the interpleader action until further order of the
court. Such process and order shall be returnable at such time as the
court or judge thereof directs, and shall be addressed to and served by the
United States marshals for the respective districts where the claimants
reside or may be found.
Such district court shall hear and determine the case, and may discharge
the plaintiff from further liability, make the injunction permanent, and
make all appropriate orders to enforce its judgment.
28 U.S.C. § 2361. This court has described interpleader actions as a “recognized
exception[] to the Anti-Injunction Act.” NGS Am., Inc. v. Jefferson, 218 F.3d 519, 524
n.5 (6th Cir. 2000).
Rather than rely on the interpleader exception, Fant focuses on the second
exception to the Anti-Injunction Act, the “necessary in aid of its jurisdiction” exception.
This exception is applicable to a district court’s continuing authority to enforce a
settlement agreement where the agreement is either incorporated into the court’s final
judgment or the court expressly retains jurisdiction over the agreement in such judgment.
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 380-81 (1994). So long as the
court is acting pursuant to this authority, the All Writs Act “authorizes a federal court
to issue such commands as may be necessary or appropriate to effectuate and prevent the
frustration of its orders it has previously issued in exercise of jurisdiction otherwise
obtained.” United States v. City of Detroit, 329 F.3d 515, 522 (6th Cir. 2003) (en banc)
(alteration, citation, and internal quotation marks omitted). Such orders are excepted
from the prohibition of the Anti-Injunction Act. See, e.g., Atl. Coast Line R.R. Co. v.
Bhd. of Locomotive Eng’rs, 398 U.S. 281, 295 (1970) (acknowledging that the
exceptions to the Anti-Injunction Act “imply that some federal injunctive relief may be
necessary to prevent a state court from so interfering with a federal court’s consideration
or disposition of a case as to seriously impair the federal court’s flexibility and authority
to decide that case”); Kline v. Burke Constr. Co., 260 U.S. 226, 229 (1922) (“It is settled
that where a federal court has first acquired jurisdiction of the subject-matter of a cause,
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it may enjoin the parties from proceeding in a state court of concurrent jurisdiction
where the effect of the action would be to defeat or impair the jurisdiction of the federal
court.”).
With these basic legal principles in mind, we now turn to the merits of this case;
i.e., whether the district court’s injunction against the Florida state-court litigation is
within the scope of the court’s permanent injunction in its final judgment and, if so,
whether this action violates the Anti-Injunction Act.
2. Permanent injunction in the district court’s final judgment
The injunction in the district court’s final judgment prohibits the interpleader
class members from “instituting or further asserting any claim . . . relating to any matter
set forth in the Amended Complaint and/or the Settlement Agreement or seeking to
reform, discharge or otherwise amend the terms of the Settlement Agreement, directly
or indirectly.” The relevant parties to the instant appeal are all interpleader class
members.
In arguing that its state-court complaint does not fall within the scope of the
district court’s injunction, Gentry asserts that the district court “misconstrued Gentry’s
state court action as seeking entitlement to the supplemental payments rather than
damages against Fant and his entities.” Instead, according to Gentry, the state-court
complaint “seeks damages from [Fant] for secretly entering into [an agreement with
Deutsche Bank that pledges the supplemental payments as collateral,] which prevents
the release of monies that would otherwise be released . . . after one quarter.” Gentry’s
complaint further alleges that Fant’s “pledge to Deutsche Bank . . . was ‘wrongful’ and
‘illegal’ to the extent the pledge was inconsistent with Fant’s promises and
representations.” The complaint, as described by Gentry, assumes the validity of the
distribution to Deutsche Bank and instead claims that Gentry was duped by Fant into
assigning away Gentry’s rights to these payments. Even a cursory review of the state-
court complaint, however, belies Gentry’s characterization of the claims actually
asserted therein.
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In the “General Allegations” section of the state-court complaint, which Gentry
incorporates into all three of its counts, Gentry asserts no less than 13 times—in
paragraphs 30, 38, 41, 45, 47, 49, 50, 52, 55, 56, 61, 62, and 64—that it is entitled to the
supplemental payments held by the district court because Fant in fact conveyed back to
Gentry the right to these payments. Gentry argues, however, that any factual allegations
in the state-court complaint regarding its entitlement to the supplemental payments are
merely “background . . . to put the alleged breach of fiduciary duty and
misrepresentations in context.” A review of the complaint again shows that Gentry
mischaracterizes its state-court claims. Allegations of Gentry’s entitlement to the
supplemental payments permeate all three of its asserted causes of action.
Gentry’s first claim—for breach of fiduciary duty—includes the allegation that
“Fant breached his fiduciary duty to Gentry by knowingly and intentionally pledging
assets, which belonged solely and entirely to Gentry and did not belong to Fant or his
Defendant companies, as collateral to Deutsche [Bank], by concealing this pledge from
Gentry, and by joining Deutsche [Bank] in its pursuit of the [supplemental payments]
as pledged collateral.” (Emphasis added.) Gentry’s claim for fraud in the inducement
similarly states that “Fant, by and through the Galway Defendants, knowingly concealed
from Gentry his intentions to pledge the [supplemental payments] as collateral to
Deutsche [Bank] despite the fact that neither Fant nor GP II had any ownership rights
to the [supplemental payments], and otherwise stripped Gentry of its rights to the
[supplemental payments].” (Emphasis added.) Finally, in Gentry’s claim for declaratory
judgment, Gentry asks the state court to “[d]etermine whether Plaintiff GP II [Fant’s
LLC] transferred all rights, title and interest in the [supplemental payments] to GP III
[Gentry’s LLC].” (Emphasis added.)
As demonstrated by these claims, Gentry repeatedly seeks a determination from
the state court that Fant in fact conveyed the right to the supplemental payments back
to Gentry prior to pledging these payments as collateral to Deutsche Bank. Gentry has
therefore attempted to put its entitlement to the supplemental payments, which are under
the exclusive control of the district court, at issue in the state-court litigation. As aptly
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observed by the district court, “Without regard to the merits, it is plain on the face of the
Florida Lawsuit that it implicates the provisions of the Settlement Agreement regarding
ownership of and claims to the Supplement payments.” We agree.
Gentry attempts to avoid this inevitable conclusion by arguing that “the parties
to the Settlement Agreement did not contemplate conferring exclusive jurisdiction of
disputes between and among members of the MTF Counsel Class to the district court.”
(Emphasis in original.) Instead, according to Gentry, “the adversaries to the interpleader
action agreed to settle and forego any further suit against ‘each other’ as to the respective
share of . . . MTF Counsel to the interpled funds and to not sue the Tobacco Companies
because of such distribution.” (Footnote omitted.) But this argument directly conflicts
with the expansive language used in the Settlement Agreement to describe its scope. For
example, the parties expressly conferred exclusive jurisdiction on the district court over
“any and all disputes relating to” the Settlement Agreement and involving “monies to
be allocated, advanced or recouped” pursuant to the Agreement.
In addition, the parties agreed that the only way for a class member (who did not
appeal the final judgment) to receive a distribution from the settlement fund is to file an
acknowledgment form with the district court. The court incorporated this provision into
its final judgment where it states that the settlement fund “shall remain under the control
of this Court and shall be disbursed pursuant to the terms of the Settlement Agreement.”
This language therefore brings the proper distribution of the fund (at least initially from
the court) within the terms of the Settlement Agreement and the final judgment.
Another section of the Settlement Agreement supports this interpretation, where
the Agreement recognizes that some of the class members “participated in a transaction
where some or all of the interests of one or more Private Counsel in and to their
respective Fee Awards for such state were pledged or assigned in connection with a
securitization transaction.” This provision would be wholly irrelevant and unnecessary
if it were not the parties’ intent for the Settlement Agreement to govern the distribution
of the subject funds to those to whom the rights to the monies had been assigned. And
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in order to make a legally valid distribution, the district court must determine the
propriety of the “securitization transaction” assignments, including Gentry’s assignment
to Fant. Gentry’s argument that the parties did not intend the Settlement Agreement to
govern disputes between MTF Counsel and their assigns therefore lacks merit.
Accordingly, Gentry’s claims in the state-court litigation fall squarely within the subject
matter of the Settlement Agreement and the terms of district court’s permanent
injunction.
3. Injunction against the state-court litigation
We must next consider whether the injunction against the state-court litigation
nevertheless violates the Anti-Injunction Act, as argued by Gentry. Fant contends that
the injunction was permissible under the “necessary in aid of its jurisdiction” exception
to the Anti-Injunction Act. We agree with Fant on this point for the reasons set forth
below.
a. Final judgment
As detailed above, the district court in its final judgment enjoined the parties
from bringing any claim related to the subject matter of the Settlement Agreement. And
“[w]hen a court issues an injunction, it automatically retains jurisdiction to enforce it.”
Wesch v. Folsom, 6 F.3d 1465, 1470 (11th Cir. 1993); see also Peacock v. Thomas, 516
U.S. 349, 356-57 (1996) (describing “a federal court’s inherent power to enforce its
judgments”); In re Diet Drugs (Phentermine/Fenfluramine/ Dexfenfluramine Prods.
Liab. Litig., 369 F.3d 293, 298 (3d Cir. 2004) (“Emphatically, the District Court is
empowered to protect its jurisdiction and effectuate the settlement agreement.”). The
district court’s enjoining of the state-court litigation, therefore, is a proper means of
enforcing its previously entered permanent injunction.
Gentry seeks to avoid application of the permanent injunction to the state-court
litigation by belatedly challenging the relevant language used in the district court’s final
judgment as “overbroad” and “broader than that to which the parties to the Settlement
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Agreement agreed,” claiming that this raises “serious due process concerns in light of
the class settlement notice.” Specifically, Gentry asserts that although the Settlement
Agreement provides for an injunction covering only those claims “relating to the
Supplement [or] Future Supplements,” the final judgment enjoins claims “relating to any
matter set forth in the Amended Complaint and/or the Settlement Agreement.”
There are a number of problems with Gentry’s assertion. To start with, Gentry
raises the argument for the first time in its Reply Brief (and in a footnote at that). The
law in this circuit is well established that “[i]ssues raised for the first time in a reply brief
are not properly before this court.” United States v. Perkins, 994 F.2d 1184, 1191 (6th
Cir. 1993). Gentry’s argument is procedurally improper for the additional reason that
Gentry failed to object to the Settlement Agreement or the proposed final judgment
containing the contested language prior to the entry of the final judgment, nor did Gentry
appeal the same.
And even if Gentry’s argument were not waived, it is without merit because the
terms of the Settlement Agreement clearly evidence the parties’ intent to confer broad
enforcement powers on the district court concerning all matters related to the Agreement,
including the distribution of the settlement fund from the court. The Settlement
Agreement expressly provides for an injunction against “any proceeding relating to the
Supplement, Future Supplements, . . . and/or seeking to reform, discharge or otherwise
amend the terms of this Settlement Agreement, directly or indirectly.”
In addition, the Agreement demonstrates that the parties agreed that “[t]he Ohio
Court shall retain exclusive jurisdiction over any and all disputes relating to this
Settlement Agreement, the enforcement of this Settlement Agreement and any monies
to be allocated, advanced or recouped pursuant to this Settlement Agreement.” Finally,
the Notice of Settlement utilizes the broader language that Gentry challenges in the
permanent injunction, explaining that class members “will be forever barred and
permanently enjoined from asserting any claim in the future in any proceeding relating
to the subject-matters of the Settlement Agreement.” Gentry’s argument that it somehow
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lacked notice of the scope of the permanent injunction provided in the district court’s
final judgment is therefore wholly lacking in merit.
b. Class settlement
The fact that this federal case involves a complex class settlement also provides
an additional reason why the district court’s injunction against the state-court litigation
is proper. For “[i]t is now settled that a judgment pursuant to a class settlement can bar
later claims based on the allegations underlying the claims in the settled class action.
This is true even though the precluded claim was not presented, and could not have been
presented, in the class action itself.” In re Prudential Ins. Co. of Am. Sales Practice
Litig., 261 F.3d 355, 366 (3d Cir. 2001); see also Moulton v. U.S. Steel Corp., 581 F.3d
344, 349 (6th Cir. 2009) (explaining that, in a fairness review of the release of future
claims in a class settlement, “[t]he question is not whether the definition of the claim in
the complaint and the definition of the claim in the release overlap perfectly; it is
whether the released claims share a factual predicate with the claims pled in the
complaint” (citation and internal quotation marks omitted)).
Part of the justification for this principle is that a class action is “analogous to . . .
an in rem action . . . , where it is intolerable to have conflicting orders from different
courts.” In re Baldwin-United Corp. (Single Premium Deferred Annuities Ins. Litig.),
770 F.2d 328, 337 (2d Cir. 1985) (citation omitted); see also Battle v. Liberty Nat’l Life
Ins. Co., 877 F.2d 877, 882 (11th Cir. 1989) (reasoning that a “lengthy, complicated
litigation is the virtual equivalent of a res” (citation and internal quotation marks
omitted)). Accordingly, the district court’s injunction is necessary in aid of its
jurisdiction because Gentry’s state-court claims threaten the district court’s ability to
administer the class settlement fund, as explained below.
Gentry alleges and seeks a declaration in the state-court action that Fant
transferred back to Gentry the right to the supplemental payments. If this is true, then
Fant had no right to pledge the supplemental payments as collateral to Deutsche Bank,
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and therefore Deutsche Bank had no entitlement to receive the payments from the district
court.
A determination of this factual dispute by the state court could have preclusive
effect on the federal interpleader case and therefore would interfere with the district
court’s ability to distribute the settlement fund. See Kline, 260 U.S. at 230 (explaining
that in parallel proceedings in state and federal court, “[w]henever a judgment is
rendered in one of the courts and pleaded in the other, the effect of that judgment is to
be determined by the application of the principles of res adjudicata by the court in which
the action is still pending in the orderly exercise of its jurisdiction”). Moreover, the
other Florida counsel, who have identical attorney-fee purchase agreements with Fant’s
various LLCs, might follow Gentry’s lead and bring similar claims in Florida in an effort
to circumvent the district court’s authority and gain a more favorable state-court
determination of their entitlement to the supplemental payments. An injunction is
therefore necessary to prevent the litigation of any claims predicated on this factual
determination in the state court and to protect the district court’s ability to manage the
distribution of the class settlement fund.
c. Statutory interpleader
The district court acted within its authority for the additional reason that the
federal case is a statutory interpleader action. In an interpleader action, a stakeholder
deposits the fund at issue (or a proper bond) into the registry of the court. 28 U.S.C.
§ 1335(a)(1). If interpleader is properly invoked, “the court determines the respective
rights of the claimants to the fund.” U.S. v. High Tech. Prods., Inc., 497 F.3d 637, 641
(6th Cir. 2007). Thus, in the typical, properly filed interpleader case, the court has
exclusive control over the disputed res. Id. 642 n.2.
Such is the case in the instant matter, where the district court explained in its
final judgment that “[t]he $66,342,904 Plaintiffs deposited in an account subject to the
exclusive control of this Court, which represents the disputed portion of the Supplement
as set forth in the Settlement Agreement, shall remain under the control of this Court and
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shall be disbursed pursuant to the terms of the Settlement Agreement.” Because the
court has exclusive control over the res—the disputed portion of the supplemental
payments—any dispute regarding entitlement to the res that is brought before a different
court threatens “to defeat or impair the jurisdiction of the federal court” to determine the
rights of the parties before it. See Kline, 260 U.S. at 229; see also In re Baldwin-United
Corp., 770 F.2d at 336 (explaining that a “federal court is empowered to enjoin any state
court proceeding affecting [the] res” in an in rem action).
Indeed, the interpleader statute provides the district court with the authority to
enjoin the interpleader claimants “from instituting or prosecuting any proceeding in any
State or United States court affecting the property, instrument or obligation involved in
the interpleader action until further order of the court,” to “make the injunction
permanent,” and to “make all appropriate orders to enforce its judgment.” 28 U.S.C.
§ 2361. There can be no doubt, given this broad grant of power by Congress, that the
district court was acting within its authority when it enjoined the state-court litigation.
4. The injunction was proper
Despite Gentry’s claims to the contrary, this is not a case in which we are being
asked to determine whether a district court may properly enjoin a state-court action
involving tort claims that are only “tangentially related” to the subject matter of the
federal case. See United States v. Ford Motor Co., 522 F.2d 962, 966-67 (6th Cir. 1975)
(reasoning that an interpretation of the Anti-Injunction Act that enables a federal court
“to enjoin a state court proceeding whenever the state suit is tangentially related to the
prior federal judgment would unduly expand the Congressional exceptions” to that
statute); cf. Sandpiper Village Condo. Ass’n, Inc. v. La.-Pac. Corp., 428 F.3d 831, 844
(9th Cir. 2005) (concluding that an injunction was not necessary in aid of the district
court’s jurisdiction where the state-court litigant did not seek to “contest the payment of
funds to class members or make a claim on the settlement fund”). Whether Gentry
theoretically could have pled independent torts without challenging the district court’s
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distribution of the supplemental payments to Deutsche Bank is not an issue raised on
appeal.
Gentry argues that the case of Burr & Forman v. Blair, 470 F.3d 1019 (11th Cir.
2006), nevertheless compels the conclusion that the district court’s injunction violated
the Anti-Injunction Act. Blair involved “a dispute among several groups of attorneys
over the entitlement to attorney’s fees awarded in connection with the settlement of a
mass tort litigation in the district court.” Id. at 1021-22. The attorney-fees fund was
“administered by a settlement administrator under the district court’s jurisdiction.” Id.
at 1023. Two attorneys who participated in the mass-tort class action brought suit for
breach of contract in state court, alleging that another law firm failed to share its
attorney-fee award with them in violation of a purported fee-sharing agreement between
the parties. Id. at 1022. The district court enjoined the two attorneys from proceeding
in the state-court action, but the United States Court of Appeals for the Eleventh Circuit
reversed on the basis that the injunction violated the Anti-Injunction Act. Id. at 1022,
1030-36.
At first blush, the Blair case appears to be strikingly similar to the instant action.
Further review, however, reveals several key distinctions. First, the class settlement in
Blair concerned the merits of the mass-tort action, whereas the class settlement in the
present case concerns only the entitlement to attorney fees. The state-court action
enjoined in the present case therefore threatens the entitlement of the class members (the
private counsel and their assigns) to their judgment, whereas in Blair the state-court
judgment “would not threaten the entitlement of the [mass-tort victims] to their
judgment,” id. at 1033.
Second, in the instant case, Gentry asks the state court to determine whether Fant
assigned the right to the supplemental payments back to Gentry, in effect seeking a
declaration of entitlement to the settlement fund. The Blair state-court litigants did not
seek such a declaration of entitlement to the disputed attorney fees. See id. at 1031-33.
Third, unlike in the instant matter, there was no previously issued permanent injunction
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in Blair prohibiting the parties from pursuing claims related to the class settlement. See
id. at 1032. Fourth, this case is an interpleader action, over which the district court is
granted special injunctive authority pursuant to 28 U.S.C. § 2361. Blair is not such a
case.
The last reason that the cases are distinguishable is that the Blair state-court
litigants in fact raised an independent breach-of-contract claim that did not assert
entitlement to the attorney fees held under the district court’s jurisdiction. Blair, 470
F.3d at 1033. In contrast, the instant case involves state-court claims that directly
allege—and in fact seek a declaration of—Gentry’s entitlement to the class settlement
fund. Accordingly, we find do not find Blair to be analogous to the circumstances of the
case before us.
We instead find the reasoning of the United States Court of Appeals for the Third
Circuit in In re Prudential Insurance Co. of America Sales Practices Litigation, 314 F.3d
99 (3d Cir. 2002), more on-point and persuasive. During the pendency of that federal
class-action case, two class members brought suit to seek damages for the manner in
which their claims were handled in the alternative-dispute-resolution process established
by the settlement agreement to provide relief to class members. Id. at 100-01. The
district court enjoined the state-court action, and the Third Circuit affirmed, reasoning
that
[the state-court] plaintiffs’ claims here constitute a direct challenge to the
system of remedies specified in the class action settlement. While
plaintiffs contend they do not challenge these procedures themselves, or
the award they derived from it, their claims cannot be separated from
challenges to the [settlement remedial procedures]. They allege, for
instance, undue delay in obtaining relief. But a determination of
unreasonable delay or improper handling is necessarily dependent on an
assessment of the adequacy and operation of the settlement’s [remedial]
procedures. It is far from certain, therefore, that plaintiffs could state
these claims in a manner sufficiently detached from the issues resolved
in the class action to avoid claim preclusion.
Id. at 104 (footnote omitted).
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In the present matter, Gentry’s state-court complaint does not set forth claims “in
a manner sufficiently detached” from the district court’s administration of the settlement
fund to avoid the permanent injunction in the federal interpleader action’s final
judgment. See id. Accordingly, the district court did not err in enjoining the litigation
of the state action as necessary in aid of its jurisdiction.
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the order of the district court
enjoining the parties from proceeding in the state-court litigation.